Britain’s tax authority will on Tuesday set out its case against investment bank Citibank NA over a £10 million ($15.1 million) tax bill it served the bank in 2013, which resulted from EU carbon allowance trades that HMRC alleges were connected with fraud.

Legal representatives for HMRC and US-headquartered Citibank will appear at an Upper Tribunal tax hearing in London, where HMRC is appealing a decision rendered by Judge Barbara Mosedale in a First-Tier Tribunal in Nov. 2014, which found that the HMRC’s statement of case (SOC) was “seriously flawed”.

In Aug. 2013, HMRC sent Citi’s UK office a bill for VAT that the bank had reclaimed on EUA trades made in July 2009, because HMRC alleged Citibank “knew or ought to have known that … its transactions in these carbon credits were connected with fraud”, according to the 2014 ruling.

Spokespeople for both HMRC and Citibank declined to comment on the case when contacted by Carbon Pulse earlier this year.

HMRC said the trades were linked to carousel fraud in the EU ETS, which European authorities estimate to have cost governments more than €5 billion in lost revenues between 2009 and 2010.

The crime, also known as missing trader fraud, involves a buyer importing goods free of VAT into one EU member state from another, selling them on with VAT included in the price, and then disappearing without paying the tax to authorities.

The Tribunal ruling showed that HMRC relied on the following “primary facts” for its allegations:

– Citi’s general knowledge of missing trader fraud in carbon credit trading

– Citi’s expanding trade in carbon credit trading, which HMRC said “grew exponentially” in 2009

– Citi re-trading the same carbon credits within a short time-frame

– That Citi carried out “superficial” due diligence

– Citi’s decision to enter into “substantial” trades with a new supplier when Paris-based spot carbon exchange BlueNext suspended trade in 2009 following suspicious activity on the bourse

– Citi’s submission of a suspicious activity report to UK watchdog the Financial Services Authority about this new supplier but at the same time continuing to trade with it

Citibank contested the HMRC’s assessment, but several reviews by HMRC upheld it, prompting the bank to lodge an appeal with the Tribunal, where it argued that there was not enough detail for these allegations and that it was unclear whether the government agency was accusing the bank or several named trading partners of dishonesty or fraud.

“The SOC was seriously flawed as either HMRC intended to allege behaviour amounting to dishonesty but failed to plead it with clarity or HMRC did not intend to allege behaviour amounting to dishonesty but nevertheless insinuated it,” Mosedale wrote in her ruling.

“The appellant [Citibank] contended that there were possible inferences of fraud from the SOC but fraud was not clearly pleaded; it considered overall the SOC lacked the necessary detail and in particular that the appellant was prejudiced by not knowing what was alleged against it and therefore was unable to commence investigations into the matters alleged.”

Mosedale ruled that HMRC had not clearly established what it was alleging Citibank of, but offered HMRC the chance to appeal and amend its SOC, while also asking that the agency clarify whether or not it was “alleging a dishonest state of mind” against third parties with which the bank traded, including Bilta (UK) Ltd, Nathaneal Eurl Ltd, and Westis Limited.

“With respect to the first two there is a clear allegation of fraud but no such allegation with respect to the third,” Mosedale wrote.

None of the three companies could be reached for comment.

The ruling also noted that the HMRC’s SOC failed to clarify why it had referred to several other companies or whether it was alleging dishonesty against them.  They included SVS Securities PLC, Skyinformations, brokerage Cantor CO2e, which was bought in 2011 by BGC Partners LP, and KO Brokers, which itself was linked to a separate carbon carousel fraud case that in 2012 saw its director jailed for 15 years.

HMRC is to present its updated SOC to the Upper Tribunal on Tuesday, when Citi’s arguments in the case are also due to be heard.

By Mike Szabo and Rebecca Hampson – news@carbon-pulse.com

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